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Feb 6, 2018, 08:15am

The Bitcoin Hype And The Potential Disruptive Power Of Blockchain Technology

An IT executive, a thought leader and contributing writer on technology topics whose innovative implementations generate business value.

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With Bitcoin value reaching $20,000 back in December and rising 1,824% in one year, the hype and mania have reached exuberant levels. This hype has also made the words blockchain, cryptocurrencies and distributed ledgers very popular. Yet to many, these are still mysterious and intimidating terms.

There are many good definitions of what blockchain is. Some are more technical, while others are for beginners. But most miss an important point about the problem that blockchain solves. It is important to recognize that trust is a fundamental element of business transactions when two parties engage in an agreement to exchange value. We have built complex institutions such as banks, judicial and legislative systems, insurance companies and others to enable trust in commercial transactions. We also created instruments such as fiat money, bonds, stocks and contracts that are backed by regulations, governments and organizations to simply resolve the trust component of business transactions.

As American journalist H.L. Mencken once said, "It is mutual trust, even more than mutual interest, that holds human associations together." Business transactions are only successful because the exchange of value between two parties is backed by a trust instrument and institutions. This is what keeps economies functioning and solves the trust problem or what is known as the “Byzantine Generals Problem.”

But building trust between two parties comes at a cost to both who end up paying a percentage of the transaction value. When I buy a product online and use my credit card, the merchant is charged as much as 2.5% of the transaction value. When I initiate a transaction and enter into a contract, such as when buying a house, I pay fees to lenders, local government, lawyers, real estate agents and others -- all of whom act as an intermediary and take a cut from the transaction value.

And this is where blockchain technology comes in handy. For the first time in human history, the trust problem can be resolved through blockchain, which guarantees an immutable transaction with no need for intermediary institutions that would take a cut of or would delay the transaction.

So, to provide the required immutable trust for commercial transactions, blockchain uses many different elements, but two are important to highlight:

In addition, blockchain technology will usher an economic shift from the classical centralized production value-chain system to a distributed, decentralized one. This new model will empower consumers to move away from intermediary institutions and professionals into direct transactions or a peer-to-peer (P2P) economic model. This will have a significant impact on many industries that operate as an intermediary between two parties and that rely on trust as a key feature of their business transactions. This includes financials, supply chains, agriculture, real estate, insurance, e-commerce, retail, utilities and many more industries. All of whom will be impacted by the blockchain technology.

This economic shift has led many to consider the blockchain technology as the next generation of the internet, with the potential to cause the next social and economic transformation, just as the internet did in the early 2000s. Gartner refers to blockchain technology as part of “the programmable economy,” where the movement of assets and value between different organizations and individuals are all managed through a blockchain.

With the Equifax security breach, protecting personally identifiable information has emerged as a serious problem that requires a fundamental solution. Blockchain can address this problem by offering a universally accepted digital ID that is highly secure and fully controlled by individuals. The next large digital company could offer a blockchain ID solution along with payment methods and money transfer features that are universally accepted. It will offer an ID that is accepted by online and offline systems, is valid to cross borders and can be used to identify people before governments and institutions. There will be no need to have several different passwords for various systems to identify yourself.

This blockchain-based ID services must capture and secure core components of identity, including biometric data such as fingerprint, face and iris recognition. Biometrics is going to be essential in identification, replacing the concept of "things that you know" (passwords and PINs) with "things that you are." There are valid concerns about the security of such data, but the cryptographic key that is controlled by the individual will make security breaches very hard (if not impossible). In addition, owners of smartphones are already providing fingerprint data, and iPhone X owners are volunteering their facial biometrics using Apple’s Face ID feature.

Similarly, blockchain will disrupt the banking industry. Banks have been an intermediary in business transactions for over 2000 years in which they get commissions or percentages of transactions. When solid blockchain solutions emerge, they will enable the transfer of money and value directly and instantly at a cost that is close to zero. Banks will be different and will not be needed to guarantee or facilitate transactions.

Blockchain technology is remarkably disruptive due to its ability to decentralize, digitize, expedite and secure transactions at a marginal cost. Therefore, organizations need to assess trust as a key feature of their value chain and evaluate the impact of blockchain on their future.

It is digital trust that is going to be the most valuable digital currency, far outweighing the fluctuating value of Bitcoin and forming the foundation for business transactions to be conducted in a much simpler peer-to-peer economic model -- one that will hold future human associations together.

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